Estimating the mortgage on a $1 million house

Quick insights

• A $1 million home’s monthly mortgage payment can be estimated by applying a standard formula using the loan term, interest rate and principal.
• When preparing to buy a home, you may also want to estimate and plan for upfront costs including a down payment, closing costs, private mortgage insurance and moving expenses.
• Seeking preapproval can help you formalize your budget and help you move quickly to make an offer in a competitive market.

Understanding your budget can help you purchase a home that is affordable to maintain on a monthly basis. In this article, we’ll walk through some hypothetical calculations that can help you understand the monthly mortgage on a $1 million home.

Mortgage basics

Depending on the terms you choose, your mortgage could be a decades' long commitment. After applying for the loan and being approved, you’ll receive the funds you need to purchase the home (the loan amount or loan principal). The loan amount then needs to be repaid, plus interest, over many monthly payments. Mortgages typically have terms between 15 and 30 years.

A mortgage is a secured loan, where the home itself serves as collateral. This means that if you fail to make timely payments, the lender has the legal right to take possession of and sell the property through a process known as foreclosure. This is the most severe consequence of missed payments; lenders and borrowers generally want to avoid it. To prevent foreclosure, conducting thorough affordability calculations before taking out a mortgage can help ensure that the loan is manageable and can be realistically repaid.

How to calculate monthly payments

Beginning to calculate the mortgage on a $1 million home requires several figures. The standard formula for monthly payments is as follows:

M = P[ r(1+r)ⁿ ] / [ (1+r)ⁿ⁻¹ ]

• P represents the loan principal: The amount you put down can have a significant impact on your monthly costs. The down payment can vary significantly, typically ranging from 3% to 20% of the home’s cost. On a $1 million house, a 20% down payment would be $200,000. A down payment of this size would reduce the loan principal for your mortgage to $800,000, lowering your monthly down payment to $5,056.54.
• r is the monthly interest rate: As with other loan products, borrowers tend to compare lenders on interest rates—a lower interest rate can mean you spend less money on the loan over its lifetime. Most homebuyers will choose a mortgage with a “fixed” rate (which never changes), while others may opt for an adjustable-rate mortgage (ARM).
• n is the number of payments: This will be the number of years times 12 months. A longer term (such as 30 years) gives the borrower more time to repay the loan, spreading it out over more payments; however, this could result in more interest paid over time.

Each of these factors are critical in determining the principal and interest portions of a monthly mortgage payment. However, monthly payments can also include separate variable costs, such as property taxes, homeowners insurance and private mortgage insurance (PMI).

Estimating mortgage costs on a million-dollar house

Using the formula above, here are several estimates for conventional fixed-rate mortgages you might get for a $1 million home purchase:

30 years, 7% and 20% down:

• Monthly payment: $5,320
• Total lifetime cost: $1,916,070
• Total interest paid: $1,116,070

30 years, 7% and 10% down:

• Monthly payment: $5,990
• Total lifetime cost: $2,155,580
• Total interest paid: $1,255,580

15 years, 6% and 20% down:

• Monthly payment: $6,750
• Total lifetime cost: $1,215,150
• Total interest paid: $415,150

15 years, 6% and 10% down:

• Monthly payment: $7,590
• Total lifetime cost: $1,367,050
• Total interest paid: $467,050

Other costs to prepare for: Upfront and ongoing

In addition to a down payment, there may be other assorted costs due at the time of purchase that need to be planned for, such as:

• Closing costs: These refer to any expenses accumulated during the homebuying process, including appraisal fees or title transfer fees.
• Escrow expenses: Some lenders may require that you put several months’ worth of property-related expenses into a designated escrow account at the time of purchase. These expenses could include things like pre-paid interest and property taxes.
• PMI: Homebuyers who make a down payment of less than 20% typically need to acquire private mortgage insurance. PMI can sometimes be paid as a lump sum at the time of purchase, or as an additional monthly payment until the homeowner reaches 20% equity in their home.

How to get a $1 million home

If you're beginning to run numbers relating to your home-buying budget, you’re already on your way toward buying. As a general outline, the steps to purchase are:

• Review your finances: Checking your credit score, reviewing recent bank statements, referencing a home affordability calculator and estimating your debt-to-income ratio can help you assess your readiness solidify your budget for purchasing a home.
• Seek preapproval: Mortgage preapproval represents preliminary approval for a real loan. To get one, you’ll need to provide financial documents that enable the lender to assess your financial profile. Being pre-approved for a loan can help you act quickly in a home purchase.
• Find your home. You can begin touring homes that fit your criteria with or without a preapproval. When you find one, you could make an offer with or without the assistance of a real estate agent.
• Finalize your loan: If the buyer accepts your offer, you can then finalize your loan with your lender. Your lender will typically require a formal appraisal of the property and may need additional documentation to complete their application process and underwriting.
• Closing: Prior to closing, you will be provided with a closing disclosure document that summarizes all costs relating to the purchase. On closing day, you will need to pay all up-front costs due before the loan is funded and you can receive your keys.

Bottom line

Calculating monthly costs related to a hypothetical mortgage can be a great way to understand affordability. The mortgage principal and interest formula can help estimate your monthly payment. However, mortgage calculators can help enhance your estimates and preparation. For personal assistance, you may want to consider reaching out to a Chase Home Lending Advisor who can answer your questions and help you understand the mortgage process.